How to Create Wealth Investing in Real Estate
“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.” -Russell Sage
When one of the richest Americans in history says that real estate is a valuable asset for wealth-building, you listen. And if you’re thinking a guy from the 1800s isn’t relevant anymore, think again. If you’re wondering how to build wealth in your 40s, 30s, and even younger, real estate equity is still one of the best ways: “Over the last hundred years, it's been one of the highest performing asset classes out there in the country" and Alabama has one of the best real estate markets in the country.
Not sure how to create wealth investing in real estate? The good news is it’s relatively simple, thanks to property equity. Let’s review the basics on how to use home equity to build wealth, with expertise from Alabama’s own financial freedom expert, Leslie Davis.
How to Use Home Equity to Build Wealth
If you’re learning how to create wealth by investing in real estate, you’ll find home equity is a game-changer! Before we dig into home equity and how to use it to build wealth, start by clarifying your financial goals: "It is all about making informed choices that align with your long-term goals," says Leslie Davis. An informed approach is especially relevant for those looking to understand how to build wealth in your 30s or how to build wealth in your 40s, where strategic financial moves can significantly impact your financial future. Once you’ve got your financial ducks in a row, we can dig into home equity basics and how you can use it to build your wealth.
In Case You’re Wondering: What Is Home Equity?
Home equity is the portion of your home's value that you truly "own." It is the difference between your home's market value and the amount you still owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your home equity would be $100,000.
Home equity can grow in two main ways:
- Paying Down Your Mortgage: As you make payments on your mortgage, the amount you owe decreases, and your equity in the home increases. This process is called amortization, where a portion of each mortgage payment reduces the loan balance.
- Home Value Appreciation: If the market value of your home increases over time, your equity also rises. This can happen due to various factors, such as improvements to the house, neighborhood developments, or broader market trends.
When Can You Start Using Your Home’s Equity for Wealth Building?
You can tap into your home equity for other investments once you've built up a substantial amount. Most lenders require you to maintain at least 15-20% equity in your home. This means that if your home's value is $300,000, you typically need at least $45,000 to $60,000 in equity remaining after borrowing. Once you meet the criteria, you can access home equity through:
- Home Equity Loans: These are lump-sum loans where your home serves as collateral. They are often used for one-time expenses or investments, such as purchasing a rental property.
- Home Equity Lines of Credit (HELOCs): These are revolving credit lines similar to credit cards. They allow you to borrow as needed up to a certain limit and are often used for ongoing expenses or smaller investments.
Once Available, Here’s How to Use Home Equity Funds to Build Wealth
- Invest in Additional Real Estate: Use your home equity to buy rental properties, generate passive income, and appreciate the value over time.
"As the value of your property increases, you have more equity to improve your net worth and re-invest your earnings. You build your good credit with each payment over time and then use your equity to re-invest in another home.” -Leslie Davis
- Home Renovations: Invest in home improvements to increase your property's value, enhancing your living experience and potential resale (and rental!) price.
- Consolidate Debt: Pay off high-interest debts using home equity, reducing overall interest costs and freeing up cash flow for investments.
- Start a Business: Fund a business venture using your home equity, potentially generating higher returns than traditional investments.
We’ve Only Scratched the Surface of Creating Wealth with Real Estate!
The Key Performance Team, led by Leslie Davis, can guide you further on building wealth using home equity and real estate. Whether you're interested in real estate investment, home renovations, or other wealth-building strategies, we’d love to share our expertise with you. Contact KPT - let's embark on your journey to financial success today!